Lost Profits May Not Be Lost

Lost profits are net gains made from sales after deducting expenses. Lost profits are recoverable in California if their extent and occurrence is proven with reasonable certainty. It must be shown that, but for defendant's conduct, the plaintiff would have made the profits. However, the plaintiff does not have to prove the precise amount of lost profits.

It is more difficult to establish lost profits for an unestablished business than an established one. For an established business, the loss of profits may be proven from “the past volume of business and other provable data relevant to the probable future sales.” However, courts frequently decline to award lost profits for unestablished businesses because the “absence of income and expense experience renders anticipated profits too speculative to meet the standard of reasonable certainty.”

Nevertheless, lost profits for an unestablished business may be shown in various ways. Lost profits may be proven with “expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.” Other evidence relevant to proving lost profits for new businesses includes: whether the business is in an established market; the plaintiff’s experience in the business he or she is seeking to establish; defendant’s own pre-dispute projections (if, for example, the dispute involves the sale of a business); and the experience of others in a similar business.

If evidence of lost profits includes a comparison to other businesses, those businesses must be similar. The comparable businesses must operate “under similar conditions, such as the same area and with the same equipment.” Further, before evidence of similar businesses may be used to prove loss of profits, there must be “a substantial similarity” between the factual basis for the profit projections and the lost business opportunity.

What is and is not a substantially similar business for purposes of proving lost profits is not always clear. In one case, the plaintiff, who was unable to open several ice cream franchises, used profit-and-loss figures from a large restaurant chain that served ice cream and from small ice cream parlors. However, plaintiff’s expert relied on the figures from the restaurant chain because it also served food, unlike the other ice cream parlors. In overturning the award of lost profits, the court of appeal noted that many restaurants serve ice cream and that plaintiff’s expert failed to establish that the restaurant chain’s business model and profit-and-loss experience were sufficiently similar to that of plaintiff’s unestablished ice cream franchises.

In another case, the court of appeal affirmed the award of lost profits to an insurance provider who was denied access into a preferred provider network. There, plaintiff’s expert based his lost profits calculation upon the average gross revenue of the top admitted providers in the area that plaintiff sought to join; and then made adjustments for factors such as services offered and expenses. The defendant claimed that the projections were flawed because plaintiff’s expert did not know the identity and practices of all of the other providers upon which he relied for his projections. In rejecting this claim, the court noted that the expert knew the name of the top provider whose services were comparable to plaintiff’s services and that plaintiff had established that it could handle a similar volume of patients as the comparisons used by its expert.

The key to recovering lost profits involves obtaining relevant profit-and-loss information for companies with similar business models, size, sales, and capacity that operate in the same market and locale; and the key to successfully preventing plaintiff’s recovery of lost profits is to exclude their evidence from trial by attacking plaintiff’s assumptions as rooted in speculation and profit-and-loss information as unreliable because it comes from dissimilar businesses with better capitalization, management, capacity. It is also important to analyze barriers to entry, which can by themselves render plaintiff’s lost profits uncertain.